Two Palestinian suicide bombers killed 22 other people and injured more than 100 in back-to-back blasts on Sunday in Israel's commercial hub Tel Aviv, police said.
Later, Israeli helicopters fired at least nine missiles at targets in Gaza City in an apparent military response to the first suicide attacks in Israel for six weeks. There were no early reports of casualties.
A Palestinian militant group claimed responsibility for the Tel Aviv bombings, which the Palestinian Authority denounced as a "terrorist" attack.
It came three weeks before a general election at which security concerns will be paramount for many Israeli voters.
The blasts, two minutes apart, tore through an area near the old bus station and a crowded mall nearby, leaving bodies strewn about, shops in ruins and people fleeing in panic from an area frequented by foreign workers in Israel's biggest city.
"The people who chose this place wanted to cause the most terrible result. What we have seen today is that Palestinian terrorism is trying to kill as many people as possible," an Israeli Foreign Ministry spokesman said at the scene.
Israeli Prime Minister Ariel Sharon convened his security cabinet after the suicide bombings, and the Gaza missile strikes on unidentified targets were launched shortly afterwards.
Palestinians also reported a build-up of Israeli armored forces in the southern Gaza Strip refugee camp of Rafah. The Israeli army had no immediate comment on their actions.
Sunday's Tel Aviv carnage followed threats of revenge for a surge in army killings of militants in the West Bank and a spate of demolitions of houses belonging to militant families.
More than two years into the Palestinian uprising, U.S. officials have called on both sides to show restraint to help Washington prepare the way for a possible war against Iraq.
The ground was coated with pieces of flesh together with nuts, bolts and ball bearings designed to maim and kill.
"They were very strong explosive devices. In each case metal fragments were added to the explosives to increase the amount of death," Israeli police spokesman Gil Kleiman said at the scene.
CONDEMNATIONS AND CLAIMS
The Palestinian militant group Al Aqsa Martyrs Brigades, the military wing of Palestinian President Yasser Arafat's Fatah faction, claimed responsibility. It named the bombers as Boraq Abdel Rahman Halfa and Saber al-Nouri from Nablus and said they carried out the attack in retaliation for demolitions of homes.
A Lebanon-based television station had said earlier it had received a claim of responsibility from Islamic Jihad.
Arafat's Palestinian Authority rejected blame hurled at it by Israel. The Palestinian cabinet said Israel had demolished 3,000 Palestinian homes in the past 27 months. The Israeli army had no comment on those figures but says it demolishes homes to prevent attacks and uninhabited buildings gunmen use for cover.
President Bush condemned the attack. "He condemns this in the strongest possible terms," a spokeswoman said. "There are those who want to derail the peace process. But the president will not be deterred."
France and Britain also issued strong denunciations.
Poor foreign workers -- mainly east European, African, Thai and Chinese -- predominate in the targeted neighborhood. Police issued broadcast assurances to illegal immigrants saying they would not be arrested if they sought hospital treatment.
A Chinese restaurant sign streaked with blood lay broken on the ground amid collapsed shop facades and awnings.
"I have been to a lot of these scenes but this is one of the bloodiest I have come upon," said a worker with a Jewish burial service hunting for body parts at the scene.
"The Palestinian Authority reiterates its position of condemning the killing of civilians whether Israelis or Palestinians," said Palestinian cabinet minister Saeb Erekat.
He accused Sharon's government of stepping up military operations to sabotage talks in Cairo between Palestinian militant factions on a possible cease-fire.
Sharon accused the Palestinian Authority of responsibility for failures to forge a truce so far. "Only when the terror is stopped will we be able to talk peace," he said.
Before the attack, the death toll of those killed since the Palestinian uprising for statehood started in September 2000, was at least 1,760 Palestinians and 676 Israelis.